The Virginia courtroom, just outside of Washington DC, was set to try what should have been a simple matter of whether or not Custer Battles, an upstart security company, based in McLean, Virginia, had defrauded its customers by as much as $50 million. By the end of the hearing last week, a perplexed judge was asked to decide whether the United States government controlled Iraq's oil revenues that were used to pay the company.

"The funds that were used were Iraqi funds, not U.S. funds," said veteran Washington lawyer John Boese, who is considered one of the nation's leading lawyers in government contract fraud , as he waved his arms in emphasis at the hearing in defense of his client, Custer Battles. "The fact that CPA was in temporary possession of the money and distributed it does not form a basis for a false claim."

Alan Grayson, the attorney for the plaintiffs, claimed otherwise. The tall Florida lawyer wearing flashy two-toned gray cowboy boots, countered that the U.S. largely controlled the Coalition Provisional Authority (CPA) that was running Iraq at the time and was clearly understood to be "a government entity" by the U.S. Congress when approving the $87 billion funding package in November 2003 for reconstruction and military spending in Iraq.

Custer Battles has been accused of illegally inflating costs on plum contracts in 2003 to protect the Baghdad International Airport as well as for a massive program that replaced Iraq's currency. Former Custer Battles employees and plaintiffs, W.D. "Pete Baldwin" and Robert Isakson, claim that the company routinely engaged in accounting trickery and used a corporate shell game involving Cayman Island subsidiaries to drum up charges by tens of millions of dollars with the clear intent to plunder funding for reconstruction efforts.

But the court fight is not yet about determining if Custer Battles engaged in illegal billing -- even though the firm's own internal audit raised red flags on the matter. It is about whether or not the United States government has any jurisdiction over the alleged fraud -- and if it should do anything about it.

"I've got to make a difficult decision," concluded federal Judge T.S. Ellis of the U.S. Eastern District in Virginia near the end of a four-hour hearing on December 17 where attorneys for Custer Battles pleaded that the case be dismissed. "This case can be decided, but only on undisputed facts," Ellis continued.

A Harvard-educated lawyer appointed to the bench by President Ronald Reagan in 1987, Ellis frequently snapped at the two lawyers arguing the case as he pressed them to focus on the core issues.

Baldwin and Isakson have brought the lawsuit under the False Claims Act, reinvigorated by Congress in 1986, which is considered a key weapon in fighting contract fraud. It allows federal courts to award financial incentives to people in the private sector to step forward and assist the government in recovering the money, if they have evidence of wrongdoing.

Boese argues that since none of the money that the CPA paid to Custer Battles came from U.S. taxpayers, the False Claims Act does not apply. Indeed, he says that the CPA paid Custer Battles with money that were recovered from Saddam Hussein's palaces, frozen international back accounts and oil revenues and not a penny more.

But Grayson says that since the CPA operated with U.S. funds, was largely staffed by U.S. personnel, and that contracts with Custer Battles were written on U.S. government forms. As far as Iraqi funds, Grayson added, the money was spent in the interest of the United States and U.S. currency was drawn from the U.S. treasury.

"Custer Battles knowingly presented false and fraudulent claims to U.S. officers," Grayson said. Noting that CPA officials initially paid the security firm $4 million in cash, he added: "They were paid in American $100 bills in cellophane wrappers with labels that said 'U.S. Treasury.'"

The opposing arguments of the lawyers reflect a broader confusion that both the Bush administration and Congress apparently share about the status of the CPA, which was dissolved at the end of June 2004 after governing Iraq for 14 months.

"This is a murky area," said L. Elaine Halchin, an analyst for the Congressional Research Service, who has sifted through piles of presidential memorandums, legislation and determinations by the General Accounting office - all of which have sometimes sent ambiguous messages about just what kind of entity the CPA was.

"Competing, though not necessarily mutually exclusive, explanations for how it was established contribute to the uncertainty about its status," Halchin wrote in her April 29, 2004 report to Congress, titled "The Coalition Provisional Authority: Origins, Characteristics and Institutional Authorities."

While Halchin agrees that the Coalition Provisional Authority represented a multinational effort to rebuild Iraq, restore stability, and aid in building an interim Iraqi government, other aspects of the authority are more obscure.

Definitive answers about how the CPA was established, under what authority, and by whom within the U.S. government have yet to be found. Materials produced by the Bush administration alternately deny that it is a federal agency and state that it is. Others suggest that it was enacted as part of United Nations Security Council Resolution 1483, which was designed to lift the sanctions burden on the Iraqi people. Then there are those materials that portray the United States and United Kingdom as having jointly launched the organization, Halchin said.

"Without a clear, unambiguous statement that declares the CPA's organizational status and clarifies its relationship with DOD and other federal agencies, various questions may be left unanswered, including whether, and to what extent, CPA might be held accountable for its programs, activities, decisions, and expenditures," Halchin concluded.

Some executive branch documents support the notion that President Bush created the CPA, possibly as the result of a National Security Presidential Directive (NPD). But the White House directive, if it exists, has not been made available to the public, Halchin found.

The court's decision about the Custer Battles lawsuit may help resolve this debate, but Judge Ellis must cut through the murky layers of administrative changes in the management and funding of post-invasion Iraq leading up to the CPA's creation.

The Bush administration initially handed responsibility for reconstruction contracts to the Office of Reconstruction and Humanitarian Assistance (ORHA) as early as January 2003. The United Nations Security Council then gave its blessing to the CPA as a unified command of coalition forces to promote the welfare and security of the Iraqi people in Resolution 1483 on May 22.

The ORHA was first headed by Jay Garner and apparently worked closely with the Pentagon and the U.S. Agency for International Development for several months. By mid-April, however, the news media reported that Garner would soon be working under Paul Bremer, the man President Bush appointed as special envoy and civilian administrator of Iraq, without seeking congressional approval.

But as, the Bush administration made no official announcement that ORHA had been replaced, or subsumed, it legally unclear what the relationship is between the two entities, although the CPA's Inspector General stated in his initial report to Congress that ORHA became CPA in May 2003, according to Halchin. As a result the legal standing of the CPA has been thrown into question, and the bigger question of whether or not it is independent of the U.S. government.

Judge Ellis seems determined to answer the question of both the CPA's independence from the United States and whether or not Custer Battles was paid exclusively with Iraqi assets. "We've raised enough questions that we need to probe more deeply," he said after musing out loud about billable hours of attorneys. "You're making more money than me."

Others have already made official, as well as conflicting, decisions on the matter. While the U.S. Justice Department declined to participate in the case against Custer Battles without comment, the U.S. Air Force, on the other hand, suspended Custer Battles from all future U.S. contracts on complaints of fraud in the company's work at the Baghdad airport and for the Iraqi currency exchange program.

Custer Battles and its associates "conspired to defraud the CPA" the Air Force announced September 20 in its suspension notice with the use of "sham companies" in the Cayman Islands and elsewhere that were used to pump up charges by as much as 162 percent. Custer Battles denies the finding and hopes to see the decision reversed, but an Air Force investigation is reported by the Los Angeles Times to be ongoing.

Ellis will hear closing arguments on the motion to dismiss the Custer Battles dispute on February 10, but the answer to whether or not the CPA should be held accountable is sure to have lasting consequences far beyond the case itself. At stake are numerous other lawsuits that accuse other companies of overcharging, kickbacks, bribes and poor performance.

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